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With the US tariffs still unclear yet the clock still counting down to their implementation (Friday next week), the news that Commerce Secretary Wilbur Ross and European Trade Commissioner Cecilia Malmstrom had spoken and plan to meet further next week has offered some measure of relief. Yet, the United States’ political risks are not just foreign in natural. A New York Times report that Special Counsel Robert Mueller had subpoenaed record from the Trump Organization spoke to renewed fears of government instability. Ultimately, the markets have made little aggregate progress whether bullish or bearish. And, with a range of critical events and data in the week ahead – tariff deadline, EU leaders summit, G20 meeting, Fed rate decision and so much more – that comes as little surprise.
Wall Street: US indices experienced a remarkable amount of intraday volatility through Thursday’s New York trading session, but it seemed the speculative rank was committed to avoiding critical progress. While the market is in on pace to lose ground on the week, there is a notable effort to fend off important technical breaks. From the Dow, that is a wedge floor that dates back to the exceptional spike low on February 9 and now stands at 24,800. The S&P 500 was struggling to close its gap opened by this past Friday’s charge. And the Nasdaq has posted up a notable hold above 7,000 with a series of technical interests in play. These aren’t the kind of conditions where technicals or concentrated sector movements will provide the impetus for market-wide movement. Macro themes carry the weight of the market’s next stage.
Top Events Next Week: There is a range of heavily influential events on the docket for next week. Be mindful though, a dense calendar can just as surely confound the market between conflicting themes as it can align speculators on a clear trend. Not all of the listings are created equally, however. Critical next week is the development around tariffs. The grace period the US allowed for its steel and aluminium tariffs to allow for cases to be made for exemption is due to end Friday. If the world’s largest consumer decides to push forward with few critical exceptions, it will almost certainly fuel a trade war that will cut global capital flow and cull some of the collective GDP across the globe. However, if the EU and US, in particular, announce a deal to avoid actions between each other, it could significantly curb the global threat. The EU leaders summit and G20 meeting are critical gatherings that are likely to cover a wide array of topics, but recent developments are almost certain to set both heavily upon means for avoiding protectionism and trade wars. There are no easy solutions, so we need to look to joint statements or threats.
Next Week’s More Traditional Events: The market-moving potential of fundamental events is partially a factor of how uncertain the outcome and even the possible scenarios are. The tariffs and summits do not have clear outcomes nor consequences, so they carry greater risk. In contrast, we have more traditional listings from Aussie jobs to UK inflation to the Fed rate decision. The FOMC meeting on Wednesday will effectively draw an inordinate amount of interest in the trading rank, but this is quite literally the most transparent major central bank lately. It is the easy assessment of the US bank’s bearing and pace that completely deflates the ‘risk’ and Dollar impact of a steady pace of hikes. A hike is heavily expected at this meeting (Fed Funds futures say 98 percent) and the running consensus is two more through 2018. The SEP that accompanies this ‘quarterly’ event will help alter the course of forecasted moves, but even adjustments here may come with a modest market reaction.
All Confident on the Western Front: The European Central Bank (ECB) has often been a global central bank slow to show their hand. Frankfurt hosted a conference titled ‘ECB and Its Watchers” yesterday, which seemed to show the ECB as united in their patient, yet confident view in seeing persistence growth that will likely lead to further monetary policy normalization.
Given the global importance of the ECB to investor confidence around the world, traders of currencies may also want to lift their expectations of less turmoil than previously feared. Recently, JPMorgan’s Global FX Volatility Index that tracks implied volatility over a 3-months’ time frame dropped to the lowest levels since January as realized volatility in FX continues to underperform implied or expected volatility. The drop shows investors that bet on volatility see a smoother 2018 may be in store for FX despite fears of a Trade War on US tariffs and a synchronized pulling away from central banks.
ASX200: Another down day for the ASX 200, but this time investors saw banks lead shares lower to close down 0.24% to 5,920 for the fourth straight drop. Banks are seen being weighed down as hearings continue at the Royal Commission on potential misconduct in the financial sector that could lead to fines cutting into margins further.
Materials were the bright spot despite the falling ASX 200 with Syrah Resources showing the greatest advance since December of 6.3% thanks to gains in copper. ADR data currently implies that both Rio Tinto and BHP will gain on the open, with RIO leading the charge with a 1% implied gain to BHP’s ADR signalling a 0.3% gain.
The breadth of the decline was lower than previous sessions with a little more than half of shares or 104 of 200 falling.
Commodities: WTI Crude Oil held the $60 per barrel level, which is seen keeping further selling at bay from institutions or hedge funds as the IEA forecasted on Thursday that a supply gap is still expected. Despite the rise of US Shale production, a sharp drop in production from Venezuela due to its domestic economic crisis is seen putting the global crude market in a decisive deficit. However, commodity investors should not be surprised if such a development causes OPEC to discuss ending curbs earlier than some buyers would hope.
Trump’s new economic adviser, TV pundit Larry Kudlow looks to have some trading advice as he said in an interview touting the benefits of a strong US Dollar. “I would buy King Dollar and I would sell gold.”
Australian Dollar: The Aussie Dollar was Thursday’s worst performing major. For economic data, the only listing of note this past session was the consumer inflation expectations for March – an indicator that can under normal conditions serve as a guiding light for the RBA on its policy setting. Yet, these are normal times. The central bank has stated no interest in normalizing monetary policy even as the US benchmark rate readies to lap it and undermine its carry appeal. It is fitting that the worst performance in percentage terms for the currency this past session were against the Japanese Yen and US Dollar - frequent funding currencies to the regular carry appeal of previous years.
SPI futures moved -14.46 or -0.24% to 5920.85.
AUD/USD moved -0.0039 or -0.5% to 0.7814.
On WallStreet: Dow Jones 0.95%, S&P 500 0.25%, Nasdaq 0.03%.
In New York: BHP 0.27%, Rio 1.11%.
In Europe: Stoxx 50 0.73%, FTSE 100 0.33%, CAC 40 0.72%, DAX 30 0.93%.
Spot Gold moved -0.39% to US$1317.69 an ounce.
Brent Crude moved 0.37% to US$65.13 a barrel.
US Crude Oil moved 0.48% to US$61.25 a barrel.
Iron Ore moved -1.12% to CNY484 a tonne, SGX Iron Ore moved -0.88% to US$71.85 a tonne.
LME Aluminum moved -1.37% to US$2091 a tonne.
LME Copper moved -0.7% to US$6913 a tonne.
10-Year Bond Yield: US 2.83%, Germany 0.58%, Australia 2.71%.
Written by: John Kicklighter, Chief Strategist and Tyler Yell, Market Strategist, DailyFX